[Insight & Opinion] Will It Be Spring or Winter When the Support Measures End?

Lee Changwook, CEO of Connected Ground,
Analyzes the Impact of Micro-Level Housing Market Policies
Concerns Rise Over Government Intervention
and Market Stability

On the 13th, after the Bank of Korea held a Monetary Policy Committee meeting and decided to keep the interest rate at 3.5%, questions poured in about how to resolve the dilemma of worsening macroprudential stability caused by the revived real estate market and increasing household debt. The market was essentially asking the Bank of Korea’s stance on the housing market rebound and the surge in household debt.

Lee Chang-yong, Governor of the Bank of Korea, stated that there is a consensus with the government on the need to alleviate the burden of household debt from a macroprudential perspective. However, if certain aspects arise that could shrink the national economy, the government and the Bank of Korea’s position is to respond with micro-level measures.

Until August last year, the government and the ruling party self-assessed that the decline in the real estate market was at a tolerable level. The Minister of Land, Infrastructure and Transport even remarked that since housing prices were long-term averaged at 12 times income but had risen to 18 times, a decline of ‘-40%’ was acceptable.

The government’s stance and policies changed starting in September. As unsold housing units began to increase, construction activity contracted, and the rate of decline in real estate prices steepened, the market fell at a near-collapse speed. Even then, efforts were made to revive the market autonomously through reforms to the subscription system, and problems arising from rising interest rates were advised to be resolved through measures like the refinancing loan program. However, by December, the market experienced a vertical drop with the monthly decline reaching a record high. At this time, a micro-level program to prevent a sharp fall in asset prices was introduced, which was the 44 trillion won ‘Special Home Loan’ implemented on January 30 of this year. Unlike previous loans that were unrelated to ‘purchase,’ the special loan was a housing purchase loan, literally a program supplying liquidity to the asset market.

After the introduction of the special loan, the market stopped declining and began to rebound. Initially, the rebound was minimal, but through May and June, a significant level of recovery appeared, and some regions even showed signs of overheating again.

Some predict that the recent rebound and upward trend in the housing market will be structural and long-lasting. The current asset market is the result of government support through micro-level programs. From July last year to January this year, over seven months, the actual transaction index for Seoul, Gyeonggi, and Incheon fell by about 20%, and the provinces also dropped by around 12%. However, since the introduction of the special loan in February, the metropolitan area saw an average increase of 6%, with Seoul rising nearly 7%. The provinces showed a modest increase of 0-2%, but the program succeeded in reviving the metropolitan market.

However, after September, as the special loan budget nears exhaustion, the era of no micro-level responses will return. Whether housing mortgage loans will increase by 6 trillion won monthly and market prices will rise, or whether demand will shrink and the market will undergo adjustment returning to the pre-special loan period is a matter for the future, but the latter possibility seems somewhat higher.

These micro-level programs cause the market to lose its natural price adjustment function. Especially if the perception builds that the government defends asset price declines, the market may trust the government and engage in riskier behavior, which could harm macroeconomic stability. If a market has no risk and only returns, it is not a market.